DBRS Comments on Santander’s 4Q12 Results – Senior at A, Negative Trend

DBRS, Inc. (DBRS) has today commented on the 4Q12 results of Banco Santander SA (Santander or the Group). DBRS rates the Group’s Senior Unsecured Long-Term Debt & Deposit at A and Short-Term Debt & Deposit at R-1 (low). The trend on all long-term ratings is Negative; the trend on all short-term ratings is Stable. The Group reported net attributable profit of EUR 401 million in 4Q12, up from EUR 100 million in 3Q12 and EUR 47 million in 4Q11. For the full year 2012, the Group reported net attributable profit of EUR 2.2 billion in 2012 vs. EUR 5.4 billion in 2011, and EUR 8.2 billion in 2010. Net income in 2012 was negatively impacted by significant net loan-loss provisions of EUR 12.7 billion, or 58.3% of income before provisions and taxes (IBPT), largely related to new provisioning requirements in Spain. DBRS notes that Santander has now covered 100% of the Bank of Spain’s new provisioning requirements for the Group.

Results in 4Q12 continue to demonstrate the importance of the Group’s significant franchise presence outside of Spain. Indicative of the earnings power of this franchise, Santander generated solid gross income (net revenues) of EUR 10.4 billion in 4Q12, only just below EUR 10.8 billion in 3Q12 and EUR 10.6 billion in 4Q11. Net revenues were driven by markets in Latin America (LatAm) offering significant growth opportunities and helping to somewhat offset the slowdown in developed economies, such as Spain and the U.K.. Santander is also experiencing pressure in its Portuguese subsidiary, Santander Totta (Totta), but this is a relatively smaller piece (approximately 2%) of operating net revenues (excluding Corporate Activities).

Helping to support the overall profitability of the Group, Latin America (LatAm) is the largest contributor to earnings. In LatAm, the Group generated significant gross income of EUR 5.7 billion in 4Q12 (55% of consolidated net revenues), though this was down 5.4% on a sequential basis as gross income in Brazil was pressured by slow growth and low interest rates, which pressured margins. Activities in Mexico and Chile continue to generate improved revenues and solid earnings. DBRS notes that elevated credit costs, albeit showing signs of stabilisation in the second half of 2012, and large minority interests are weighting on net attributable profit in LatAm; this profit decreased by 12.1% year-o-year (YoY) to about EUR 1.0 billion in 4Q12, as compared to an increase in net revenues of 2.1% over the same time period.

In Santander’s home market of Spain, which continues to generate about 20% of the Group’s operating net revenues (excluding Corporate Activities) on a quarterly basis, conditions remain challenging. In Spain, Santander generated net profits of EUR 236 million in 4Q12. This compares to net profits of EUR 432 million in 3Q12, and EUR 29 million in 4Q11. Profitability has improved YoY, but remains below the pre-crisis pace in 2007 of approximately EUR 800 million to EUR 1 billion per quarter. Revenues continue to be pressured by lower margins with higher provisioning further impacting the bottom line. Attributable profit in Spain in 4Q12 would have been negative if the extraordinary provisions related to Spanish requirements were reported within Spain rather than in Corporate Activities. The Group continues to focus on deleveraging in Spain, particularly through a reduction of loans to real estate developers.

The macroeconomic and regulatory environment in the U.K. also remains challenging, hindering Santander’s revenue generation ability with an overall decline in volumes (except for small and medium enterprise (SME) lending although absolute figures remain low) and very low interest rates, which have a significant impact on the Group’s large mortgage portfolio. Net interest income continued on a downward trajectory, declining 2.9% quarter-o-quarter and 18.3% YoY, though the Group has been able to offset this decline with increased fees to keep gross income above EUR 1 billion. In the U.K., Santander has been increasing its loans to the higher-yielding SME sector and improving loan spreads, though not enough to offset the increased cost of deposits. On a positive note, the level of provisioning stabilised in 4Q12 relative to 3Q12.

For the Group, asset quality ratios remain elevated, with a non-performing loans (NPL) ratio of 4.5% at 4Q12, up only slightly from 4.3% at 3Q12, but up much more from 3.9% at 4Q11. Driving the ratio are the Group’s exposures in Spain where the NPL ratio was 6.7% at 4Q12 (up from 6.4% at 3Q12 and 5.5% at 4Q11), which includes the Santander Branch Network (4Q12: 9.7% vs. 3Q12: 9.6%) and Banesto at (4Q12: 6.3% vs. 3Q12: 5.7%. In other geographies outside of Spain, NPL ratios increased on a sequential basis in LatAm, with moderate increases in Brazil (4Q12: 6.9% vs. 3Q12: 6.8%), Mexico (4Q12: 1.9% vs. 3Q12: 1.7%) and Chile (4Q12: 5.2% vs. 3Q12: 5.0%). While Portugal’s NPL ratio deteriorated more notably to 6.6% at 4Q12 (vs. 6.2% at 3Q12), the Group’s exposure to Portugal is relatively small. Santander continues to position itself to successfully weather the extended economic crisis. The Group has bolstered its levels of generic and specific provisions (EUR 26.2 billion at 4Q12, up from EUR 19.7 billion at 4Q11) to cover expected future losses.

Maintaining solid levels of funding and liquidity, the Group has further reduced its loan-to-deposit (LTD) ratio to 113% at 4Q12 from 117% at 4Q11 (including retail CPs), with a LTD ratio in Spain of 96% at 4Q12. Importantly, Santander has been able to access the wholesale markets through debt issuance in Spain and local markets, such as in the U.K. and LatAm. Additionally, the Group repaid in January 2013 EUR 24 billion to the ECB which was borrowed through its long-term refinancing operation (LTRO) facility. In addition to having no capital shortfall under the latest stress tests (Oliver Wyman), the Group reached a 10.33% core capital ratio based on Basel II standards at 4Q12, above Bank of Spain’s requirements (minimum of 9%).

Notes:
All figures in Euros (EUR) unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]